Friday thoughts

Apologies for yesterday's no-show, but Macro Man had to drop his children at JFK for a kids-only holiday in Blighty. Given the, ahem, "efficiency" of both the air and road transport systems, your author got home late and was too tired to do anything but hit the sack.

So. The story of the week has been, if anything, the slightest of pushbacks against the "loadsamoney for everyone forever" narrative that has shaped much of the central bank narrative recently. Consider:

* Kristin Forbes said in the Telegraph that the BOE needs to see more evidence before cutting rates

* Kuroda pooh-poohed the notion of helicopter money in a BBC radio interview

As such, it is perhaps unsurprising to see a continued gentle back up in bond yields and a decline in gold.

However, there are mitigating circumstances for each of these:

* Yesterday's UK retail sales data was putrid, and of course we get the flash PMIs this morning. The consensus looks for quite a big tumble (down more than 4 points for manufacturing and 3 for services), but that consensus is based off of nothing but sheer conjecture at this point. It's kid of hard to take the under when the forecast is for such big drops, but to be honest nothing short of a rise in sentiment would be particularly surprising.

* While the BOJ obviously wants to maintain independence, at this point it's hard to even argue for helicopter money until the government passes a supplementary budget and, importantly, issues more JGBs.

* Draghi did say that the ECB was willing, ready, and able to deliver more easing if such were required. While not quite "whatever it takes", it did at least provide rhetorical cover for further easing at the September meeting.

Perhaps Draghi's most pointed comment was about the travails of the European banking sector, which he described as a "profitability, not a solvency" issue. That's all well and good, of course, but if you extend profitability issues long or deep enough, they have a funny way of turning into solvency issues sooner or later. This is particularly the case for an industry such as banking, where balance sheets are enormous in relation to shareholders' equity; a slight downward nudge to the value of assets held, and you can create a solvency issue straightaway. Do you really believe that every loan on European banks' balance sheets are marked correctly?

Switching gears, it's been noted here and elsewhere how remarkable it is that the VIX has fallen so far, so fast. On the face of it, of course, it's not surprising that vol is low with the SPX near all time highs. Still, with all the potential risks out there, it nevertheless raises an eyebrow. Spot VIX is currently 6% below the 1 SD Bollinger bands around the 40 day moving average; while not unprecedented, it is pretty low.

What is close to unprecedented, however, is the steepness of the curve. Macro Man plotted the rolldown of the 3rd vs the 1st VIX futures contracts, and compared it to the level of the spot VIX. The ensuing scatter plot looks a bit like a jellyfish or a comet; either way, the current reading, marked in red, is clearly an outlier. In many ways, this steepness reflects the market's concerns over various bricks in the wall of worry. When the curve flattens, that will be the sign that complacency has set in....and that's the time to load up on puts, if you're lucky enough to see it happen.

This weekend sees another G-20 meeting in China, which perhaps explains the recent handbrake turn in the RMB/CNH. If it persists into next week, meanwhile, we can have a greater degree of confidence that enough is enough.

18
comments

Currently on bae-cation*, sunning myself on a beach (tumblr views* btw), checking in on market prices via iPhone, and writing my memoirs (see: Diary of a 12yo Hedge Fund Manager).

I see from the comments that some people r spinning out*, but tbh I'm chilled with this market action. Equity indexes are consolidating - they either continue ranging, or undergo a pullback, then we move higher. If we range, it's just EZ-money, if we pullback, then JBTFD. Remember, "winter is coming" (lolz GoT), and when it does, SPX will be much, much higher #Goals.

I would guess the steepness in VIX is if anything contrarian and likely just an artifact of increased availability/popularity of the likes of VXX/VIXM etc.

You didnt give much coverage to Bullard's 63bps to infinity and beyond. Noticeably it arrived just prior to Brexit vote and likely played a role in the brevity of that "correction." We know productivity growth isn't going anywhere. Not an expert on liquidity premiums of gov't debt but would assume this to mean until they can come up w some more supply global QE will itself cause rates to stay low. Curious as to your interpretation.

Great post on VIX. It is striking how bearish of VIX the VIX option market has been over the past few months (really since March fomc) - the post brexit vix collapse is in a sense an echo of the VIX net positioning collapse in April -- there was a key pivot point in March when VIX net spec went from crazy net long to crazy net short.

If you pull up a time series of later dated VIX futures you will see a pattern of higher lows and as you point out the steepness, even with spot so low, is noteworthy. I suspect the low spot levels has a lot to do with the SPX making fresh highs and summer grind; but the steepness is also a nod to the principle that as the market melt up increases and US data performs in a decent way, the odds of rate hikes escalate quickly.

What is also striking in the U.S. equity options market is how put-call skew on SPY options has fallen so much - typically that put-call expands when spot gets so low.

Just noticed LIBOR backing up a bit over the last few wks. Apparently has something to do w institutional investors not liking floating NAVs on Prime MM funds and switching to govt instead. Considering who some of the main borrowers are GFI it could get interesting.

Another armchair perspective on VIX. Going back to 2004, today's closing level of 12.02 is in the 10th percentile (90% of the readings in the last 12 years have been higher). This seems particularly strange given the state of the world as I type this, both economically and socially (very fond memories of Munich). The wind has died down and the water looks glassy, but the sky is dark as night.

LB is writing from England this morning, where it already seems clear that a slowdown is in the cards (too much uncertainty pre-and post-Brexit vote). With BoE, BoC and RBA all soon to embark on easier money policy, one source of dollar strength seems clear. As we await additional ECB "measures" can one really be anything but long USD and short oil/metals commodity FX/equities? We exclude the BoJ from the above analysis as they may soon signal that it's not their turn, so long JPY.

@12y-o HFM: most of us appreciate a bit of self-conscious irony and that was delightful. Thanks. Some of us here enjoy your blog persona even if not always in agreement with the positions expressed [although the intellectual simplicity of the JBTFD investment model does appeal]. LB personally also enjoys a reminder of what it was like to be young, cocky and to know everything, while chillin' with Bae (aka totty*). Brilliant.

@MM and Maelstrom: analysis of vol much appreciated. If there is one thing I have learned here over the years it is that when Price Action is really really boring, the discussion turns to vol, or the lack of it, and during Silly Season, sometimes the discourse will turn to delightfully arcane considerations vol of vol. My experience is that once we find ourselves discussing VIX optionality that SOMETHING soon happens to trigger a more interesting period of Price Action.

Let's say that I can never remember going into a FED meeting with employment as firm as this, yet spot VIX as low as this, and surely I am not alone, and this explains the steepness of VIX futures. The punters buying Sept/Oct vol are simply making a rational bet that the Fed will hint at action in a later meeting, and/or that the "dots" will be moving. On that note, MM, did the "dot plot" lose all credibility when Bullard totally misplaced what remains of his mind in recent months? Although nothing will be done on Wednesday, the July meeting has importance in signalling future actions. September is the only plausible live meeting this year, October being too close to the election. Hikers and Hawks Club is on vacation but their voices will be heard.

I agree on your view on volatility. MM is absolutely right to point to the curve, but I am worried here. I think it will be a hot late summer in the markets. I am very careful here, and have added to net shorts in equities.

Meanwhile in the U.K. Yes, you're right, the economic slowdown has started. May and her hardcore Brexiteers really need to decide how long they will let this run. Quite simply, it is stupid to hold your breath for a crisis in the EZ to vindicate your case since your own economy might go down the tube before it happens. This, incidentally, is regardless of whether the EZ eventually WILL have a crisis again. The problem simply is that the U.K. now is mired in uncertainty and the engine which is the City of London can only hold on for so long before it stutters. If Brexit really does mean Brexit, best to get on with it soon. I reckon they'll wait, though, which means that the U.K. economy probably will have to suffer a nasty short-term blip. We will see whether it is enough to ruffle the feathers of the government enough for it to break.

I have read you VIX analysis with some interest...I run a 180 MA, 60 MA and 30 EMA on the VIX and find that while the Spot VIX is quite low, the EMA is still over the 60 and 180 MA, indicating volatility ahead...

this higher volatility cross started last summer, 2015 when the markets began gyrating...

"European diplomats are understood to be looking at granting the ‘emergency brake’ on EU migration for up to seven years."LOL.... and the deal making now starts in earnest. Pity they were not so willing before the vote because we wouldn't be in this position today given that there was always a number like myself who simply wanted a period of consolidation rather than a fullblown exit.

After declarations that there could be no single market access without free movement of labor, EU governments are actually considering a "time-limited" 7-10 years (that's a long time!!) brake on migration in exchange for single market access?

Post-PMI, I thought being short GBP until the MPC meeting was an easy one. Not so sure about that! Thoughts?

Yes, the 30 EMA just slipped under the 60 MA VIX a few days ago, but s till hugging it, and is still above the 180 MA, indicating a underlying volatility, other indicators watched like up vol and dn vol are very high as well...we are in for a wild ride.